ISSUE ANALYSIS

a division of Home School Legal Defense Association
April 30, 2001

The Universal Tuition Tax Credit

What is the Universal Tuition Tax Credit (UTTC)?

Joe Overton of the Mackinac Center for Public Policy developed the Universal Tuition Tax Credit plan for Michigan in 1997. The UTTC is based on the simple principle that citizens and businesses should make education a priority, and that those citizens and businesses already making education a priority should not be penalized or taxed unfairly. This is not a new concept; similar plans are cropping up all over the United States. A tax credit plan was enacted in Arizona in 1997 and in 2000 the Virginia Institute for Public Policy created a tax credit plan proposal for the state of Virginia.

Although many states have been taking steps to enhance educational freedom, no state has yet to relinquish its monopoly over K-12th grade education. Currently, most families who seek independent education must pay tuition for an independent school while simultaneously paying taxes for state schools they do not use. A plan like the UTTC is one way to ease the financial discrimination against families seeking independent educations for their children. The UTTC establishes basic fairness by allowing parents and others who choose an alternative school-private or home school-to do so without being penalized.

What are the benefits of the UTTC?

Like a traditional education tax credit, the UTTC lets parents deduct a portion of schooling costs from their state tax bill. But unlike traditional credits, the UTTC has been uniquely designed to assist families with limited or no tax liability. Therefore, under this plan, any parent, individual taxpayer, or business could receive a dollar-for-dollar reduction in tax liability for money spent on tuition. The benefits that make the UTTC unique from other tax credit plans are the following:

  • It gives parents more control over their children's educations by empowering the parents to select and pay for their children's schools,

  • It reduces the financial penalty borne by parents seeking independent schools for their children,

  • It generates competition among schools, spurring improvements in both independent and government schools, and

  • It raises scholarship funds for students in need

It is important to recognize that the UTTC is a tax credit, not a tax deduction. This means that it can be subtracted directly from the taxpayer's tax liability, not simply used to reduce the basis of the tax. Thus, if a taxpayer has a pre-credit tax liability of $3,000 and a tuition tax credit of $2,000, the taxpayer would pay tax of only $1,000. Similarly, businesses could pay $1,000 tuition for each of 1,000 students and receive a $1 million tax credit provided the credit did not exceeded the business' tax liability.

Why would an individual or business pay for a child's education?

Often when given the choice of paying taxes for general services or directing some of those taxes to scholarships, many people will prefer to assist students. This was the case when in 1997 Arizona adopted legislation that allows taxpayers to contribute up to $500 to a "tuition organization," which distributes scholarships to students to attend independent schools, and to take the same amount off their tax bill. In 1999 more than 30,00 people contributed almost $14 million to 31 clearinghouses, which helped nearly 7,000 low-income students attend independent schools. [Fritz S. Steiger, "Voice for Choice," Fact sheet, Children First CEO America, July 25, 2000]

How would the UTTC plan work?

A plan like the UTTC would likely be phased in over a nine-year period. Starting with a maximum credit available of 10%, in nine years' time it would rise to 50% of per-pupil revenues.

With a tax credit like the UTTC, the taxpayer pays tuition for a student at a public or nonpublic school, and when he calculates his taxes, he subtracts the amount paid in tuition (subject to a maximum limit of 50% of what public schools receive per student) from his tax liability. The UTTC would offset a portion of private or public school tuition and would be claimed against state tax liabilities.

It is important to note that the state is not involved in writing checks or selecting the school. The taxpayer, having already made the funding of education a priority, is simply allowed to offset a portion of the taxes he pays to support the school system he does not use.

Is the UTTC the same as a tuition voucher?

No. Tuition tax credits, as explained above, are subtracted from the taxpayer's liability and the individual's contribution goes directly to the recipient, thus avoiding unnecessary government involvement.

Tuition vouchers, on the other hand, are certificates from the government that can be redeemed for a certain amount of money. Under the current application of the separation of church and state principle, the reality that vouchers are tax dollars dispensed by the government automatically complicates the disbursement and opens the door for endless litigation. When the government issues a voucher to a church school, for example, there is an immediate assumption that the government is responsible to hold the recipient accountable. As one observer noted, "government shackles follow government shekels."

Conclusion:

In addition to improving education, a plan like the UTTC would save an individual state hundreds of millions of dollars per year. The UTTC would help needy families with low state tax liabilities by encouraging the creation of corporate scholarships to offset tuition costs not covered by the UTTC.

The UTTC avoids the problems inherent in vouchers of giving state funds to support religious schools, draining funds from the public schools, and spawning new entitlements or over regulation of private schools. A tax credit plan like the UTTC plan in Michigan is an important step to free citizens from the government's educational monopoly.


For further information on this issue, contact Sarah Durkee at the National Center for Home Education at: 540.338.7600, or by fax 540.338.8606, or e-mail NationalCenter@hslda.org.